October 15, 2013 7:19 pm
The debt-ceiling doomsday device
By Martin Wolf
The ceiling is so dangerous because Obama could not obey it in a non-destructive way
Some laws are too dangerous to be allowed to remain on the books. Take, for example, the US debt ceiling. It is the legislative equivalent of a nuclear bomb aimed by the US at itself, with the rest of the world within its blast radius. What must never be used should not exist. Regardless of the outcome of the current negotiations, the law needs to be repealed. Orderly government cannot be pursued under so destructive a threat. It is quite different from a partial government shutdown. Albeit foolish and unjust, that is just about manageable. Failure to lift the debt ceiling is not.
The imbroglio over the ceiling does have a darkly amusing side. Many will recall Republican insistence that “uncertainty” was thwarting economic recovery. Yet it is difficult to imagine policies better designed to create maximum uncertainty than a possible default by the world’s most important debtor. Asked about the consequences of a failure to reach a deal on the ceiling, Jamie Dimon, chief executive of JPMorgan Chase, responded: “You don’t want to know.” But we must seek to know; the results would be calamitous.
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Why is the debt ceiling too dangerous to use? This question has two answers.
The first is constitutional. In a recent article, Neil Buchanan of The George Washington University and Michael Dorf of Cornell argue that a binding debt ceiling would create a “trilemma” for the president: “Ignore the debt ceiling and unilaterally issue new bonds, thus usurping Congress’s borrowing power; unilaterally raise taxes, thus usurping Congress’s taxing power; or unilaterally cut spending, thus usurping Congress’s spending power.” Thus, a binding debt ceiling would force the president to violate his obligation to “take care that the laws be faithfully executed”. The authors conclude that the president should choose the “least unconstitutional” course and ignore the debt ceiling. But, inevitably, whatever the president did would create a constitutional crisis. No responsible Congress would seek to put the president in that position.
The second reason why the debt ceiling is so dangerous is that the administration could not obey it in a non-destructive way. At some point between October 17 and the end of the month, the administration would lack the money to pay its bills. All choices would be dire.
One much discussed choice is “prioritisation”: the federal government would pay “high priority” claimants, such as the Chinese government, and default to “low priority” claimants, such as beneficiaries of Social Security or Medicare. Yes, the idea is that awful.
The US Treasury has two potent objections. First, prioritisation would not protect the “full faith and credit of the United States” – it would still be a default. Second, the US government’s computer systems do not allow it to choose among the close to 100m payments it makes a month. But Fedwire, the system that handles sovereign debt payments, is distinct from the systems making payments to government agencies and other vendors. So maybe the US Treasury could pay the former obligations first and then use any remaining money for the latter, a possibility it denies even exists, to preserve its bargaining credibility.
Even if possible, which is unclear, the politics of prioritisation would be disastrous. Yet the economics of a failure to service debt would be worse. US Treasuries are the world’s most important safe assets. If they were to default, even temporarily, there would be an immediate impact on risk premiums and a quite possibly permanent impact on their role as havens. Haircuts would be imposed on their use as collateral. The result, as my colleague Gillian Tett has noted, might be a huge disruption to market liquidity and credit across the world. A Lehman default is one thing; a US default would be quite another. No wonder the gathering of central bankers and finance ministers in Washington last week for the International Monetary Fund/World Bank annual meetings was so agitated about the issue.
The less economically damaging alternative would seem to be for the US government to default on its non-debt obligations. Indeed, many in the Tea Party believe the ceiling is a way to impose a balanced budget, though one that would curtail even the short-term borrowing normal for households. Today, this would require immediate elimination of a deficit of about 4.2 per cent of gross domestic product. An instantaneous cut of this magnitude would lower GDP by far more than the 6 per cent that conventional multipliers might suggest. The reason is that all built-in stabilisers would be cut off. As revenue fell along with GDP, spending would automatically shrink further. GDP could fall 10 per cent. This would inflict a domestic and global disaster.
Thus, if the administration were to obey the debt ceiling, it would have a choice between a debt calamity and an output disaster. Yet Barack Obama is also right that he cannot concede to people wielding this threat because that would increase their incentive to use it and so, in the long run, the likelihood that the bomb would explode. This device needs to be disarmed. Alas, that is not going to happen.
So the administration also needs to decide what it would do if the ceiling were not to be lifted in time – be it now, next month or at a later date. The least bad answer would be: keep borrowing. The president cannot state he would do so, before the fact. Indeed, he must deny it, since knowing this would lower his opponents’ incentive to raise the ceiling. Yet, if it came to the worst, he would have to borrow, invoking the need to preserve the credit of the government, without which it would be permanently damaged.
Borrowing under a constitutional cloud would be risky. The simplest way to minimise these risks would be to borrow short-term. After all, the US Federal Reserve must ensure that the interest rate remains zero, in order to preserve its monetary policy. The House of Representatives might impeach the president for the “high crime” of ensuring the US government fulfils its promises, but this would fail in the Senate. Someone might challenge Mr Obama’s decisions in court. But how could a judge conclude that the president acted unconstitutionally if Congress has given contradictory instructions?
It is insane that such a discussion is even possible. Abolish the ceiling now. It is an invitation to mischief.
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The best part is that a trillion dollar coin makes the debt ceiling irrelevant without repealing it which would surely set the stage for an eventual repeal.
Nothing would really change w/ macro because the Treasury borrows from primary dealers now w/ the Fed swapping IOUs for credit on reserve accounts (QE).
The PDs would become 'Fed for a Day', monetary policy would pretty much remain intact as 'inverse QE' or 'QE 3.5'.
Once the knuckleheads realize they cannot effect the function of the Treasury by going on strike they will return to work and do their jobs.
These are (1) to preserve the union (2) to pay the legal debts of the nation.
Should the president act as he must, the immediate result could well be impeachment proceedings the House which are ignored by the Senate.
The Republic will on the verge of armed insurgency.
The man on the white house arrives and assumes dictatorial powers, based upon Obama's actions. His name is Ted Cruz.
There is absolutely no future hope for the Republican Party in its current form. There is only so much gerrymandering they can do to have the remotest hope of running the Senate and the White House. Peter King should lead the charge to establish a new party and leave John Boehner to lead with the nutters.
God forbid that we should actually fund Social Security properly-instead of stealing Social Security money and then blaming the recipients for being "greedy." More GOP wackiness.
Not only are the costs to the economy equivalent to the detonation of a number of nuclear devices, also the days of the Republicans as a party would be numbered when social security and medicare payments were to be suspended. Now it does seem that a number of senior Republicans such as Mitch McConnell have finally heard the clarion call. Let's hope they're on time.
I've always greatly admires the USA. It's innovation and creativity is extraordinary. From the moon landings the internet, it's accomplishments are vast. Yet it also seems to have a dark and destructive minority. We can only hope that they get smaller and those sane and enlightened get larger.
As to your assumptions as to who will be held accountable for a failure to agree a compromise on the debt ceiling/budget, time will tell. Recent polls would suggest that neither political party, nor the president, would escape untarnished - which is the way it should be. So, who exactly has who by the "short and curlies"? I would suggest that there is ample reason for both sides to come to the table in good faith.
And I'm pretty sure there's some precedent for one Congress reconsidering the actions of a previous Congress. The 18th/21st Amendments come to mind.
In any event, despite your apparent intentions, you seem to have made the same argument I'm making, and you seem to agree with my understanding as to how democracy is meant to work. It's reassuring to know that I am in good company.
"Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here.’' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. AMERICA HAS A debt problem and a FAILURE OF LEADERSHIP." (Emphasis added.)
His remarks are weirdly appropriate to the current impasse. I couldn't have put it better myself.
In April 2011, President Obama dismissed his vote against raising the debt ceiling as “just an example of a new Senator, you know, making what is a political vote as opposed to doing what was important for the country.”
If you don't like his principles, he has other principles.
The Chinese government is rich and can afford to do without some debt payments.
The recipients of Social Security are poor and need the money to survive.....
Pretty sick, when you think about it.
perhaps you should reflect a little more on what you write -- do you really understand how democracy works?
the Tea party agenda of small government, low taxes, balanced budget appeals as an abstract credo. But effective right of centre politicians (Reagan, Thatcher etc.) always understood that this sort of vision was only ever a long term goal, that in order to move in the direction they wanted to go it was always necessary to work constructively with those who do not fully share their view of the world. That is democracy.
by working to overturn legislation that is already passed the tea party are acting against the very process of government itself (don't like a law that has been legislated, well no problem we can always use the next budget round to have that law cancelled or delayed).
This a huge gamble, voters want some government and they want it to work efficiently, even if most of they would like it be a bit smaller, less expensive and less intrusive than it is now. So the prospective outcome is a huge electoral set back for the Republican party (if it does not split into two in the meantime) and a strong shift towards socialism in the US.
No reason for Obama to negotiate at all -- to use a British phrase he "has you by the short and curlies". You either back down or face electoral oblivion. Unfair and underhand? Well that is how effective politicians play ... they don't have to be nice when the game is in their hands.
the only two rational interpretations of right wing Republican actions I can think of are (a) a conspiracy theory -- the tea party have actually been infiltrated by left wing socialists who want to see a socialist future for the United States; or (b) a totally selfish focus of right wing Republican members of the House on their own individual prospects in primary elections, because they might lose to even more right of centre radicals, and they do not care if their selfishness results in socialism in the United States.
And then you indicate that it would be best to abolish the debt ceiling as it only leads to unrest in the markets and the world at large.
You are wrong mr. Wolf. It's not the ceiling that is causing this. It's the never ending crave for non existing money to be created out of thin air that's causing this. Keynesians like you have to learn to live within their means. The world will become a much safer place. And debt ceilings serve the function why they were created in the first place.
To stop the pot from boiling over until its dried up
It will be interesting to see what happens to the repo market, etc. Though IMO the game has already moved on. "interesting times"
As long as we continue to elect captured or ignorant politicians (left wing or right wing) we will have deficits and debt slavery.
My intention was not to open the discussion about the merits of Obamacare. Just to be clear, though, its approval in Congress involved not a single Republican vote, its upholding in the Supreme Court was solely on the grounds of whether it was actually constitutional (ie, legal) and not on its merits and polling shows that it is not exactly supported by a majority of the electorate. And, in light of the fact that the president cannot just push through the financing of Obamacare as he did its implementation, one must ask who, actually, could be said to have lost the election.
In any event, reverting back to my main point: there is ample room for negotiation around the budget/debt ceiling issue, and there is no need to even contemplate (or justify) a constitutional transgression when a clear, constitutional solution is perfectly available. If the president takes the approach that he needs to "call the Tea Party's bluff", there is a high probability that this is all going to end in tears. And if that happens, the president should be held firmly responsible.
And as to whatever "side" I'm on, and whether me (and my ilk) are responsible for destroying the GOP, I would suggest that you may not want to jump to conclusions as to who I am and what my allegiances are. "Obama must not and will not be blackmailed." - Really? Who is the fanatic?
The debt ceiling has been part of the US constitution since the country had public debt.
In 2006 senator Obama voted against increasing the debt ceiling, this at a time of lower deficits and debt. Keynes said the boom is the time to cut the deficit and in 2006 the US was growing strongly so Obama's actions had some merit. However, he now says it was a "political positioning", this was part of a strategy he used to raise his profile as set up a presidential run.
The likes of Ted Cruz, Rand Paul etc are playing from the same copybook so Obama can hardly complain.
Tea Party Republicans are as nutty as General Jack D. Ripper, who set off the Doomsday Device because he feared commie infiltration of America's 'bodily fluids'--a premonition of 'Obamacare'?
(By the way, I'm a different person to 'Rory H', and generally a great admirer of Mr Wolf.)
I thought this argument had been conceded by most Republicans. You return to the Tea Party demand that the President somehow "make concessions" with the ACA. Why would he make any concessions in an act approved by Congress, challenged in, and upheld by, the Supreme Court, and subsequently endorsed by the American people as a central plank of his reelection campaign?
You suggest his only way out of the dilemma is to back down on his modest proposal for healthcare. Actually, were he to do that, he would be ensuring that all of his successors would be liable to be held hostage by a small group of fanatics who lost the election but were intent on destroying the credit of the US unless they achieved an aim which had been rejected by the people in a ballot.
Obama must not and will not be blackmailed. The only way out of this dilemma is to call the Tea Party's bluff, invoke the democratic solution and allow the House to vote on the Budget. There are enough sane Republicans who believe it is quite wrong, and destructive, to allow a small right-wing coterie to hold the President to ransom, and the House will, therefore, vote to pass the budget.
The numbers holding your view, as the polls attest, grow ever smaller by the day. Your side has lost this battle. You may have destroyed the GOP in the process, which is a tragedy for the American people.
Now Mr Wolf is learning the same lesson. And he seems genuinely surprised.
"Cake or more cake?" is what he's after.
Where have they been for the past 20 years? Trying to build a world where the only options are good ones. Not gonna happen.
http://getwd50.blo...d-as-hell.html?m=1
The US is holding a loaded Magnum 44 to its head and is schizophrenically repeating to itsself, "just try me, go ahead make my day".
Not a very clever idea. The end of the idea of a reserve currency would be hot on the heels of such action.
The pure undiluted absurdity of this argument makes me light-headed. There are variations on the main theme, but if the president would make concessions on the timing of the implementation (not even the substance, at this point) of his healthcare legislation, the debt ceiling and budget issues would be resolved. The president, frankly, has to decide whether his legacy (by way of Obamacare) is more important than the US (and, even, global) economy. As such, it is not a box, but a dead-end, and the only way out of a dead-end is to reverse course - in this case, back through Obamacare.
And, as an aside, the debt ceiling is not nuclear bomb which the US has aimed at itself; rather, it is a control which many American people feel it is necessary to maintain on its politicians because they fundamentally do not trust them to manage the government's finances responsibly. Would anything in this budget / debt ceiling crisis debacle suggest that this distrust is unfounded?
"Now we have a debt of 130% of our GDP..... " The UK has had a debt ratio of about 250% after the Napoleonic Wars and Second World War. It was over 150% after the First World War. Yes, they were exceptional situations. Yes, paying off the debt was painful and required occasionally creative accounting and exceptional measures (inflation certainly helped). But we paid back the debt. People should stop talking as if a 100% ratio (or even a 200% ratio) implies certain default. It depends on the ability of your economy to grow out of the problem, and it depends on the willingness of the politicians (and people) to pay the debt.
"On the other hand forcing the issue to be addressed in spite of the pain might mean that the resulting recession is containable, rather than terminal." You've heard of the Great Depression, right? The Second World War? You realise that is what you're talking about when you talk about a "containable" recession, I hope?
It is too bad other countries do not have it.
If the markets do not do their job (i.e. they keep lending money at ridiculously low rates to countries such as the US, UK, France...) this wake up call is good news.
Perhaps the fact that deficits do matter eventually will start to sink in. Same for a country as for a household.
Politicians incentive is always and everywhere to spend money they do not have. That is not a criticism, that is just how things are. Unless you have constitutional budget equilibrium mandates, public financial affairs will always drift into debt abyss. It took time - 30 years or so - but now many countries are just debt slaves.
Congress's borrowing and taxing powers, yes; but Congress's SPENDING power ???
Spending is what the government does, not congress.
The US military has plans for invading anybody.
It is the administration's most pressing duty to have a plan to prioritize spending. And to motivate Congress, perhaps Obama should articulate it.
The bomb which threatens to explode is not a nuclear one. It is instead a rather well targeted smart bomb aimed at the financial sector. Many bankers would suffer, as they should, for their daft belief that government debt is 'safe' when history shows that it everywhere turns into voluntary taxation in the end. Anyone who holds too much of it (financiers mostly) would be knocked; anyone who accepts it as collateral without a discount would be severely hurt (financiers); so would many users of high leverage (yes - financiers again); while anyone who insures against default in this stuff would be crippled (you guessed it - yet more financiers). This is why Mr Dimon utters darkly that we "don't want to know" - a rather patronising utterance in my view, with a suggestion that only he is both clever enough to understand, and kind enough to hide the horror from us. Believe me, he is neither.
No - the genuinely nuclear explosion is what happens when the Dimons of this world persuade the Wolfs that they must not address the real problem just yet, while they continue to profit from making it worse. That is financial appeasement. On the other hand forcing the issue to be addressed in spite of the pain might mean that the resulting recession is containable, rather than terminal.
and so are the US politicians
Removing it will be akin to letting politicians run amok with spending and borrowing. And you do not understand why this exists, then you have an issue with human nature. The Debt Ceiling is part of the check and balance of a proper democracy. And using it to reign in spending is the correct thing to do.
The debt ceiling is clearly a very dangerous piece of legislation that does not make sense, since US borrowing needs are the result of congressional budget decisions.
It is a pity that the Obama administration did not spend its two years of democratic majorities in both houses to get rid of the debt ceiling and cleaning up some other areas of economic governance rather than focusing so much on Obama-care - even though the latter in and by itself is clearly a worthy piece of legislation.
I believe that the Founders envisaged both of these legislative bodies to function on an overall basis in accordance with majority rule.
The American people should demand that both houses enact reforms to ensure that important legislation always comes to the floor for a majority vote.
The government in Washington D.C. should try democratic government. It works pretty well in a lot of other countries.
First, most of the media coverage of the debt ceiling crisis assumes that the Tea Party Republicans who are threatening to set off this financial nuclear bomb are acting out of ignorance of the consequences - that they "know not what they do". This may be true in the case of the brainless, Sarah Palin wing of the Tea Party, but it certainly doesn't apply to people like Ted Cruz or the people who bankroll him over at Heritage Action.
They know exactly what they do- namely setting off the financial nuclear explosion which Mr. Wolf talks about in order bring down the duly elected and reelected president, and beyond that, America's entire democratic system of government. Their goal is a right wing putsch, but one that using defaulted US treasury bonds instead of tanks. They have a visceral, fundamental hatred of democracy, because it is rapidly changing the face of America from white to brown, and it is also forcing the wealthy elite to give up a little of their power and privileges. Their goal of causing as much economic and political chaos as possible is deliberate, not incidental.
Second, this brings up the question of what Obama will do in this asymmetrical battle between the majority of Americans who want to preserve our economy and democracy from collapse, and the small minority which is trying to destroy them. The irony is that, as Mr. Wolf suggests, President Obama will have to become a strong executive, specifically by raising the debt ceiling unilaterally under the 14th Amendment. Possibly, this may be going beyond the Constitution in order to preserve it. As Mr. Wolf mentions, this may lay the ground for impeachment proceedings in the House, but what else is new?
The far right has been out to impeach him ever since he was first elected five years ago, President Obama should not be afraid to let the Tea Party have its little impeachment circus in the House, if that is what it takes to save America, and the word from a "nuclear" financial catastrophe. Then let the voters deal with Ted Cruz's Tea Party cohorts and their cowardly Republican supporters in Congress next year. Then no matter what financial and political bombs Ted Cruz and his fellow Tea Party fanatics try to set off, America, and the world, will be able to say, in the words of Horace: Non omnis moriar.
Roger Algase, Attorney at Law
oh and your socialist Obama, he actually has shrunk the government.
... I don't think anyone thinks that any of the tea party representatives are responsible.
In particular, I dispute the argument that because the US system seems to work well in calm times it should be sustained in turbulent times. The boundary conditions for success of the US government system, it seems to me, relate not to external stability or low/high deficits but rather the willingness of two sides to talk and compromise to reach agreement. That willingness is temporal and contingent.
In my view, the US system works admirably if the dominant voices in both the D&R parties are moderate enough to want to work out a middle ground. But, of late, one of these great parties has become observably influenced by extremist tendencies that see no honor or achievement in compromise. It is obvious which one I am referring to. Given that the debt ceiling legislation exists (the case for which, of course, was challenged in this article) it is clear where the immediate blame for the current impasse lies
Either they continue "solving" the debt by borrowing more, blowing more bubbles as it has been happening both in the US and in Europe as well, or as some of the European countries have done the US has to start a serious austerity program.
As we see in Europe even the austerity is only a temporary solution, since anything only makes sense if somehow the quantitative growth returned.
And this is the problem, as constant quantitative growth is simply impossible, it has already exhausted itself since it is unnatural thus it has no basis within a closed and finite natural system humanity exists in.
We are not in a political or economical crisis, we are in a system failure.
Only fundamental, systemic changes can help, and that is way beyond the present discussion.
The present state with the "shutdown" and the debt ceiling discussions is like people stranded on a small island waiting for the rain, trying to decide who can hold the umbrella, while a huge tsunami is coming...
And yet, you are just one American. Perhaps the rest might have a say too.
There are plenty of bad people in the world that think their actions are morally justified, so don't bandy fashionable morals around as some sort of trump card.
I made no comment on my own views of state healthcare provisions, so don't project other peoples opinions onto me. I'll state my own as and when I want.
I like selling assets to the Fed on a repo agreement. I'm sure it is totally bogus but Ben Bernanke has shown that he can buy literally anything in a pinch. How about all government buildings and land to the Fed balance sheet. That should pretty much eliminate the need for any debt ceiling ever.
I was not starting an argument about fiscal deficits. I was pointing out that the deficit is large enough to have a substantial impact, given the weak environment, were automatic cuts to kick in and a default to occur. At the height of the boom, do you think that a temporary US default would have crashed the global economy? The gridlock in Washington, the financial crisis and the deficit all make for a rare set of circumstances.
After the 95/96 shutdown, the US actually managed to keep it's finances in check for about a decade, having previously run substantial deficits: the ceiling works.
Obama has centralised social policy enormously. It's no surprise that the Europeans love him because he is creating a European style government in the US.
The unitary theory supports my point on this. It is an "executive". Nothing more.
It came to be in a world without the entitlement spending programs we now have. Back then, debt issuance either had to be authorized by Congress or was limited in what the money could be used for. Many states require legislative approval of bonding bills. Can you imagine going back to a world with that?
Mr. Wolf is, I believe, correct in his explanation of the legal dilemma the President faces. But I disagree that the issue is separate from the separation of powers. Eliminate the debt ceiling, and then either we rely on Congress to approve new debt for our ever-increasing entitlement obligations every time its needed. Or remove its power of the purse and leave public borrowing to the President or the Treasury. Just thinking about what it would take for any such scenario to happen gives me heartache.
I just know that the more you increase the debt ceiling, the higher the debt roof you’ve got to get down from, sooner or later.
If this essay somehow represents a "left-wing" viewpoint, then I guess anyone who notes that the earth rotates to make the sun rise in the east and set in the west must also be a left-winger, because Mr. Wolf's statements here are the rough equivalent of that fact.
Presumably Mr. Rory H. adheres to the "viewpoint" of the know-nothing nihilist set of Republicans in the current USA Congress, for whom the most gratuitously destructive action or inaction has such appeal.
The debt ceiling has nothing to do with the US constitution or the separation of powers. It is an inherently unconstitutional law because, as I wrote, it requires the president to disobey the law. It is, as such, indefensible. Which part of this argument do you find hard to understand?
The idea that Obama has decided to make the presidency particularly powerful is beyond absurd. The presidency has been vastly more powerful under many predecessors, not least his immediate predecessor. Do you remember the unitary theory of the executive?
You forget to mention what is by far the most likely outcome if there is no deal. The fed will simply send the treasury a few t bills "as a gift".
However, the problem with Martin is he's part of that left wing intellectual elite who never see an end to spending (or borrowing for that matter).
Clearly cutting spending and borrowing in the bad times is not desirable, but unfortunately it's necessary because the left cannot be trusted to run sensible budgets in the good times!
At the last minute, the cavalry will charge and order will be restored
before that other cliches have to be acted ,
the stern speeches talking about the good of the country
are the equivalent of crashing a sidewalk pile of cardboard boxes during the chase
worst case, the employee in charge of registering the deal is on furlough
the paperwork is not processed
American history has shown that at a pinch the president would shove respectfully the constitution aside
Now, now. That's not what I said.
Once the Supreme Court had ruled this constitutional (which it might do because it would be considered essential to protecting the integrity of the United State, much like defending the country as Commander in Chief), future presidents would, like British Prime Ministers, be free to propose their own budget for approval or refusal (with no room for line amends).
The T-Party should be careful what it wishes for.
@HuwSayer
These devices are not designed for tricky times, though. Indeed the assumption is that in difficult times agreement is easier to reach. They are designed for boring times, to keep the president accountable. And, in boring times, they work admirably and according to the dispositions of American citizens.
By your logic, congress should also be abolished. What possible purpose does it have, other than interfering with the business of the president? Of course, the presidency is not supposed to be as powerful a position as Obama has decided to make it.
No, no. It's best not to make decisions about how best to tear apart institutions and constitutions at a time of panic, when everyone is excited and emotional.